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2020 has been a big year for initial public offerings (IPOs) – where companies launch their own stocks for investors to buy and sell on public stock markets. Among the companies that have made IPOs, we find Snowflake, a data warehousing company; By Dash, a restaurant food delivery service; and Airbnb, the business connecting hosts and guests around the world. (2019 saw Uber and Elevator start.)
IPOs can be very exciting, but they can also be dangerous. Here’s a look at the pros and cons of investing in IPOs, along with five companies expected to debut in public markets in 2021.
Image source: Getty Images.
The case of IPOs
So why would you want to invest in an IPO? Well, because with the businesses you are interested in that you would really like to own, getting in as early as possible seems better, right? Think about all the great companies we know now, such as Amazon.com and Netflix: They have hugely rewarded their long-time shareholders – especially those who entered on the ground floor.
When companies that people are excited to debut in the markets, there is often a trading frenzy, causing stocks to soar in their first few minutes, days or months. Consider, for example, that Snowflake had priced its initial shares at $ 120 each. This is the price at which insiders and connected investors and institutions were able to buy. The shares started trading at $ 245 each, giving these preferred buyers an immediate gain of over 100%. (Snowflake shares were recently trading at $ 323.)
The case against IPOs
Despite the allure of IPOs, it’s usually best to avoid them. Yes, the early investors in companies like Amazon.com and Netflix have done phenomenal results, but most of the new companies in the market are not turning out to be the next Amazon or Netflix. And even with those who do, you can very well earn a few years or several years after they start. Consider Amazon had its IPO in 1997, about 23 years ago, but if you had only owned it for the past 10 years, you would be up over 1,600%, and over over the past five years you would have more. that quadrupled your money – apparently with a lot of growth yet to come. Netflix debuted in 2002, and those who have only owned it for the past decade are up about 1900%. It is not vital to get started in a large company when going public.
Various studies suggest that it is in fact unprofitable, on average, to jump into IPOs, and that the best strategy is to give those fresh stocks a year or two to settle down. Some of these stocks don’t even survive their first year – Pets.com debuted in 2000 and went out of business within a year. Many IPOs surged far beyond reason to begin with – the delivery service Webvan, for example, debuted in 1999 and was quickly valued at over $ 6 billion, although it generates only $ 5 million in annual revenue. It went bankrupt in 2001.
Upcoming IPOs in 2021
Still, interest in IPOs persists, and you might want to know which IPOs are expected in the coming year. Here are five top ones that you could at least observe – and maybe invest in, if and when they don’t seem too overpriced.
Robin Hood
Robinhood is a relatively new equity trading platform which, with its easy to use app, is gaining popularity, especially among younger and newer investors. It had 10 million users at the end of 2019 and reportedly added 3 million more accounts in the first quarter of 2020.
Robinhood has received a total of $ 1.7 billion in venture capital funding (“VC”), according to Crunchbase, from venture capital firms such as Sequoia Capital, Institutional Venture Partners and D1 Capital Partners. It is reported that the company has chosen Goldman Sachs as the primary underwriter for its IPO, and that it could debut with a value of around $ 20 billion.
Bumble
Bumble is a dating app with over 100 million users that has expanded its reach to help its users meet friends and connect with other professionals. Its dating service is distinguished by a focus on women, allowing them to take the first step. Bumble is reportedly looking to debut in open markets in February, valued at around $ 6 billion to $ 8 billion. Once public, it will have deeper pockets to compete with Match group and others.
Instacart
Instacart is one of the success stories of this pandemic period, seeing a surge in demand as many consumers who previously were not interested in grocery deliveries suddenly found themselves in need of grocery deliveries. The company appears on many lists of companies slated to go public in 2021. Sources say 85% of US households have access to Instacart delivery, making it a national force. The company was reportedly valued at around $ 13.7 billion in a funding round in June.
The next door
Nextdoor.com is a popular website and app that allows neighbors to communicate with each other – about lost pets, burglaries, potholes, and recommended handymen, among others. In October, it was rumored that the company was considering an IPO, possibly with a valuation of between $ 4 billion and $ 5 billion.
Bandaged
Stripe might be one of those five you least know about, but it has grown into a big player in “fintech” – tech companies focused on finance and financial transactions. It boasted a valuation of around $ 36 billion, in an April funding round, and it’s probably worth a lot more today. Indeed, there are reports of the company seeking additional funding, with a valuation close to $ 70 billion. Best known for its Stripe Payments system, Stripe’s services are used by millions of businesses around the world.
What to do
All in all, it is better do not jump into IPOs. Remember, you can very well invest in stocks that have been around for a while. They offer the advantage of having several years of financial statements to study, among other things. Dividend stocks are a particularly powerful type of stock to consider investing in. If you are determined to get into an IPO, be sure to read them first.
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